Goldman to Fidelity Call for Calm After Global Stock Wipeout

Argentina’s peso started sliding as the central bank pared dollar sales to preserve international reserves that have fallen to a seven-year low. Photographer: Diego Giudice/Bloomberg

Feb. 4 (Bloomberg) -- Panic is making an enemy of
telephones for Catherine Yeung, the director for equities at
Fidelity Investment Management Ltd. in Hong Kong.

“My children hate that BlackBerry,” said Yeung, whose
clients have been calling amid two weeks of declines that erased
$3 trillion from global stocks. She’s advising calm, noting that
profits are rising and shares just got a lot less expensive.

“Being a contrarian and getting in when things seem bad is
often a good thing,” she said in an interview today. “The
companies we are looking into can still deliver attractive
margins. Things are getting cheap.”

Strategists from Goldman Sachs Group Inc. to AMP Capital
Investors and JPMorgan Chase & Co. are also telling clients to
hang on after losses that began with currencies in Turkey and
Argentina spread to developed markets. The Standard & Poor’s 500
Index slid 2.3 percent yesterday, capping its first 5 percent
retreat in eight months, while Japan’s Topix index plunged 4.8
percent for its biggest decrease since June.

“We didn’t expect the U.S. would be this weak,” Kathy
Matsui, chief Japan strategist for Goldman Sachs in Tokyo, said
by e-mail. “Since we do not see sufficient reason to change our
fundamental earnings outlook and stock prices have fallen, the
market still appears attractive to us.”

The American equity gauge rose from a three-month low
today, adding 0.9 percent to 1,757.17 as of 1:35 p.m. in New
York.

Strategist Forecasts

Matsui’s 12-month forecast for the Topix is 1,450, about 27
percent above its level today. The index trades for about 15
times annual profits, close to the lowest in three years after
all but 16 of its 1,775 constituents slid, the most since at
least 1997. Twenty-one strategists tracked by Bloomberg predict
the S&P 500 will reach 1,956 this year, on average, representing
an 11 percent increase from its level now.

Forecasts like those did little to prop up shares in the
U.S. yesterday after a report showed factory output expanded in
January at the weakest pace in eight months and China’s official
Purchasing Managers Index decreased to a six-month low as
production and orders slowed. Signs of a weakening recovery come
as the U.S. Federal Reserve affirms plans to cut stimulus that
has propelled a 160 percent rally in the S&P 500 since 2009.

Emerging Markets

It’s worse in developing countries, as the MSCI Emerging
Markets Index drops to a five-month low and losses in equity
benchmarks from India, Russia, Brazil and Mexico exceed 4
percent for 2014. A custom Bloomberg index of the 20 most-traded
emerging-market currencies has fallen about 2 percent this year.

Russia canceled a bond auction for the second consecutive
week after the emerging-market rout sent yields on the nation’s
bonds maturing in 2028 to record highs. The Finance Ministry
scrapped the sale after “an analysis of market conditions,”
according to a statement on its website.

“The optimism for Russia is long gone,” said Vladimir
Tsuprov, the St. Petersburg-based chief investment officer of
TKB BNP Paribas, the investment partner of the French bank, in a
phone interview. “The only surprise for us was how quickly the
ruble had declined in January. This was unexpected.”

Shocks began on Jan. 10, when the U.S. Labor Department
said payrolls rose by 74,000 in December, below the 197,000
median forecast of 90 economists surveyed by Bloomberg.

Losing Momentum

Two weeks later, a report from HSBC Holdings Plc and Markit
Economics Ltd. said Chinese manufacturing may contract for the
first time in six months. That added to concern growth in the
Asian nation, which buys everything from Chile’s copper to South
Korea’s cars, is losing momentum. HSBC and Markit confirmed that
manufacturing in the nation shrank in January.

Argentina’s peso started sliding as the central bank pared
dollar sales to preserve international reserves that have fallen
to a seven-year low. The central banks of India, Turkey and
South Africa all raised interest rates to defend their
currencies as they tumbled.

The result has been losses for seven of the last nine days
in the MSCI All-Country World Index, erasing more than 5
percent. Stocks around the world are down for January after
rising from September through December last year, the longest
streak in a year.

“We’ve become addicted to having one decent month after
another,” said Nicola Marinelli, who helps oversee $180 million
as a fund manager at Sturgeon Capital Ltd. in London. “If you
look back at what happened in 2011, 2008, this correction is
simply one of thousands. So if you speak with dealers, speak
with other investors, this isn’t a feeling of panic.”

Bond Buying

Buying at the depths of the European sovereign-debt crisis
in October 2011 would have generated a total return of 51
percent in the MSCI gauge, according to data compiled by
Bloomberg.

While Fed bond buying is being curtailed, it’s because
policy makers say the U.S. economy is strengthening. In
announcing it will cut monthly purchases by $10 billion, the
Federal Open Market Committee said on Jan. 30 that labor-market
data “were mixed but on balance showed further improvement”
and economic growth that has “picked up in recent quarters.”

The Fed left unchanged its statement that the target
interest rate will be left near zero “well past the time” that
unemployment falls below 6.5 percent.

Growth Story

“Short-term forces in the U.S. point to continued growth
in all major categories of demand, while the long-term EM growth
story remains intact,” David Kelly, the chief global strategist
at JPMorgan Funds in New York, wrote in a note to clients today.
His firm oversees about $400 billion. “The plain fact is that
very low domestic interest rates for investors holding the vast
majority of global financial assets should continue to pull
money away from fixed income and towards equities.”

Some strategists say the losses aren’t over. Inflation-adjusted interest rates are still too low in developing nations
for Citigroup Inc. to predict an end to the retreat in
currencies. Argentina’s peso tumbled 19 percent last month,
while South Africa’s rand plunged 5.7 percent and Russia’s ruble
dropped 6.5 percent.

Stock markets may continue declining, sending the Nikkei
225 Stock Average down as much as 25 percent from the peak,
according to Tim Schroeders, who helps oversee about $1 billion
as a money manager at Pengana Capital Ltd. in Melbourne.

“Markets are vulnerable to a further correction,”
Schroeders said by phone on Feb. 4. “The pullback could
surprise some people. Perhaps the downside will be a little bit
more than people think.”

Market Momentum

Momentum in the U.S. stock market is slowing as the bull
market enters its sixth year and after the S&P 500 surged 30
percent in 2013. Almost 200 companies in the benchmark gauge for
American equities traded below their average level over the past
200 days yesterday, more than any time last year, according to
data compiled by Bloomberg.

Investors are pulling money from exchange-traded funds that
track emerging markets at the fastest rate on record. More than
$7 billion flowed from ETFs investing in developing-nation
assets in January, the most since the securities were created,
data compiled by Bloomberg show.

Losses among commodities have been less than equities, with
the S&P GSCI measure of 24 raw materials down 1.4 percent this
year. Gold rallied 3.8 percent to $1,251.92 an ounce since the
start of January. The London Metal Exchange index of six
industrial metals including copper and aluminum fell 4.4 percent
in 2014, the worst start to a year since 2010.

Less Optimistic

“There may not have been so many euphoric long positions
in commodities as in equities,” said Bjarne Schieldrop, chief
commodity analyst at SEB AB in Oslo. “Everyone and their
grandmother have rolled into equities as they continued to get
higher day by day. Thus, there are not so many heading for the
door in commodities when things look less optimistic.”

The global economy will grow 3.7 percent this year, up from
an October estimate of 3.6 percent, the International Monetary
Fund said in revisions to its World Economic Outlook released
Jan. 21, citing accelerating expansions in the U.S. and U.K.
Economies of Japan, Europe and the U.S. are forecast to expand
together for the first time since 2010, according to data
compiled by Bloomberg.

Even as emerging markets crater, the outlook for global
earnings remains robust. Profits in the MSCI All-Country World
Index are forecast to increase 17 percent this year and 11
percent in 2015 and 2016, according to analyst forecasts
compiled by Bloomberg. Nader Naeimi, who helps oversee $131
billion as a Sydney-based money manager at AMP Capital
Investors, says people bailing now may regret it.

Removing Froth

“Some investors are schizophrenic,” Naeimi said in a
phone interview. “You have started to see fear back in the
market which you hadn’t seen for some time. This is good from a
contrarian perspective, to remove some froth from the market,
reduce complacency and gives me a buying opportunity.”

The retreat since Jan. 23 has done little to dent the $9.6
trillion of stock value that was created worldwide in 2013, when
the S&P 500 advanced 30 percent and the Topix climbed 51
percent. Speculation that developed-market equities were due for
a retreat has built for months, including forecasts in January
from Blackstone Group LP’s Byron Wien and Nuveen Investment
Inc.’s Bob Doll Jr., who both called for a 10 percent drop.

“We should keep our calm,” said Karim Bertoni, a Geneva-based strategist at de Pury Pictet Turrettini & Cie., which
manages about $3.3 billion. “A 10 percent decline wouldn’t be
surprising,” he said. “It’s something that happens a couple of
times of year, nothing per se unusual. That’s why so far I think
we are more in a classic correction than anything else.”